Savers Beware: The Fed is “Robbing” You Blind

In case you hadn’t already noticed this fact – you never know who lives under a rock these days – the Bureau of Labor Statistics just supplied the evidence. Its latest report shows that over the last 12 months inflation has run at 2.9%. What you could buy with a hundred dollars back in February 2011 now costs you $102.90.

Thank the Fed for this. Actually, you can thank other central banks around the world as well. Everyone and their dog is printing currency with abandon in an effort to ensure that prices go up, not down.

Congratulations. It’s working. This is a fabulous development for someone… somewhere. I’m just not sure who…

For the rest of us, it sucks. We’re paying more to eat, drink, drive and entertain… essentially to live. All because central banks are doing everything in their power to motivate us to spend.

More specifically, the Fed is trying to motivate us to borrow and spend. When we’re spending, or borrowing money and spending it, the economy grows. With a growing economy, unemployment declines. More employed people means they have more money to spend. People win, the economy wins, and the Fed gets a gold star for meeting two of its three objectives, fighting inflation and containing unemployment.

Sounds like a win-win situation, right?

Well, if you call cutting savers’ legs off at the knees a “win,” then maybe. Personally, I think the Fed’s actions are punishing the responsible members of our society while encouraging the irresponsible to continue behaving badly.

Watch Out for the Target on Your Chest

The Fed is hurting savers in two ways:

1. By keeping inflation high enough (at 2.9%) to create buying urgency. If the prices are constantly going up, it makes sense to buy now rather than wait until tomorrow.

2. And by keeping interest rates low. Low interest rates are great when you’re borrowing. They depressing when you’re saving.

Thanks to the Fed’s Operation Twist and other market actions it has successfully kept 10-year interest rates around 2%.

But the inflation rate for the past year was 2.9%.

That means investors who put their money into 10-year Treasury bonds essentially lost 90c for every $100.

I’d feel happier if the Fed just put a gun to my head and told me to hand over my cash. That way, at least, I’d know I’m being robbed.

The Tide is Turning

The good news is the tide might be turning… the markets are getting tired of all the intervention.

Over the past few days interest rates have been moving higher. Unlike stock prices, trends in interest rates tend to have long moves.

This move resulted in us recently selling one of our solid fixed-income positions in our Boom & Bust portfolio. It had paid us nicely. It even treated us to capital gains over the past year, far outstripping the paltry 2% paid on 10-year Treasuries. However, as rates move back higher, fixed income will decline.

We are determined not to save our way to the poor house by owning high quality fixed income in the face of low rates and high inflation. Instead, we’ll seek out better yields.

We’re sure the Fed doesn’t like us, but we don’t care.

Harry

P.S. A good place to go for higher yield savings and checking accounts is EverBank. In fact, with a high yield pledge account at EverBank, you could earn 13.8 times more yield than the national average. Fore more details or to open an account click here. In the interest of full disclosure, we do have an advertising relationship with EverBank, so we may receive compensation if you chose to open an account. But we wouldn’t recommend them, or even have this relationship with them, if we didn’t believe they were one of the best options in the market.

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About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

About Us

Economy & Markets Daily is the first e-letter of its kind that uses the power of demographic trends and purchasing power to accurately identify economic and market boom and busts.

We believe that knowing what consumers are going to buy next (purchasing power)... or what they'll stop buying soon... is the best way to protect your investment portfolio, maximize your returns, and make smart business and financial decisions.

Each week day, Harry Dent, Rodney Johnson, and Adam O'Dell share with you their views on demographic trends, their market research, their economic research, the housing market, economic cycles, market cycles, business cycles, and the looming economic collapse and market crash.